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Saudi oil minister Ali I. al-Naimi, left, and Prince Saud al-Faisal, foreign minister. Al-Faisal said Bush “didn’t punch any table or shout at anybody.’’ (Photo by Mark Silva)

The Swamp

The Saudi boost of 300,000 barrels a day will push output to 9.45 million a day in June, in response to growing demands from customers.

by Mark Silva

RIYADH, Saudi Arabia - The Saudis have agreed to only a modest boost in oil production, announced in the midst of meetings with Saudi King Abdullah and President Bush over tea, lunch and dinner and an overnight stay for Bush at the palatial horse farm where the Saudi ruler keeps 150 thoroughbred Arabian stallions.

But, for the second time in five months, the Saudis have rebuffed the Bush administration’s request for significantly stepped-up oil production to ease rising oil prices. The Saudi oil minister said the Saudis already had marginally boosted production by about 300,000 barrels a day, as of May 10, to meet world demand, including U.S. demand, as they see it - boosting production to 9.45 million barrels a day during June.

The Saudis have made it clear that they see no great world demand for increased production, Stephen Hadley, the president’s national security adviser, said after private meetings between the president and king at Abdullah’s ranch - and they are not bowing for one customer, albeit the world’s biggest consumer.

“What they’re saying to us is… Saudi Arabia does not have customers that are making requests for oil that they are not able to satisfy,” Hadley said.

The talks were carried out in private, but both sides spoke about them afterward. Prince Saud al-Faisal, the Saudi foreign minister, was asked how forcefully Bush had made the case for boosting production.

“The discussion was carried out in a friendly fashion,” Saud told reporters. “I don’t know what you mean by forcefully — he didn’t punch any table or shout at anybody… The president showed great concern for the impact on the American economy… and we of course sympathized with that completely. But on our part, we are doing everything we can to help the international economy by producing as much as is needed.”

In the midst of these talks, the discrepancy between gas prices in the land of plenty and land of consumers could hardly be more dramatic: While gas goes for about 46 cents a gallon on the furnace-hot streets of Riyadh, the average price of a gallon of regular in the United States this week reached $3.73.

The Bush administration repeatedly has attempted to convince the Saudis that the impact of soaring gas prices on the sluggish American economy is bad, in the long run, for the profits of oil producers.

“The message the president has sent to oil suppliers in the Middle East, and I’m sure will continue to send, is that… suppliers of oil, as they consider their pricing policies and as they consider their production targets, need to take into account the economic health of the global community,” Hadley had said before this visit. They “need to take into account the economic health of their customers who pay these prices. ”

But the president’s newest appeal for stepped-up production - the same appeal that Bush personally made to the king in January, when the price of oil still hovered below $100 per barrel - conflicts with a firm Saudi practice of matching oil output with demand and maintaining stability in the world’s oil market, while heeding to production quotas set by the Organization of Petroleum Exporting Countries.

The U.S. may be the world’s biggest consumer, but the Saudis insist they cannot yield to the desires of one customer.

While stepped-up production could alleviate pressure on rising prices, analysts say, the Saudis, who produce one-tenth of the world’s oil, have no incentive to assist the United States alone.

“The reality is, the market isn’t being driven by us,” said Anthony Cordesman, a senior fellow at the Center for Strategic and International Studies. “It’s being driven by China, by India, by rising Asian demand, which guarantees a market into the long-term.”

Oil is the mainstay of the Saudi economy. It was first discovered here in the 1930s, but large-scale production didn’t get underway until after World War II. Now, the Saudis export more than $200 billion in oil products a year, 90 percent of their GDP.

High oil prices in the 1970s made the Saudi economy the fastest growing at the time, but also promoted more production around the world, leading to a glut in the ’80s. The Saudis, who had been producing nearly 10 million barrels a day in 1980 and ‘81, cut production to about 2 million a day in ‘85. And the Saudis submitted to the OPEC’s quotas in an effort to maintain stability in the world market.

Lately, the Saudis have pledged to raise their full capacity for drilling from 11 million barrels a day to 12.5 million by the end of 2009. But in the meantime, the Saudis have been actually producing just 9 million barrels a day, about 10 percent of the world’s supply.

Saudi Arabia has slightly exceeded OPEC’s output quotas for six months, it was reported this week in trade journals - the 9 million barrels produced in April exceeding the quota of 8.9 million. The Saudis had kept their production slightly below quota last year. They say they will produce 9.45 million a day in June.

“Every month, we receive (orders) from our customers worldwide,” said Ali I. al-Naimi, Saudi oil minister. “On may 10th we increased our response to our customers by 300,000 barrels, because they asked for it… This is per the request of about 50 customers… As far as the U.S. is concerned, most of the 300,000 came from the U.S. and we responded to it on May 10th.”

Still, the difference between what the Saudis are producing and their capacity to produce - about 2 million barrels a day - represents nearly all of OPEC’s potential surplus.

And that 12.5-million barrel-a-day capacity should suffice well into the near future, the Saudis say.

“Saudi Arabia has no policy not to expand, but we are very pragmatic in this area,” al-Naimi said. “We need to make sure that the demand is there… We have always maintained about 2 million barrels per day of extra capacity, and we intend to do so in the near future.”

The cartel of 13 oil-producing nations, which together account for about 40 percent of world production, has resisted pressure from the U.S. and other leading consumers to increase production to stem rising prices. Oil prices reached a new record, $127 per barrel, this week.

Me: That includes Iran who in my opinion are pressuring the other nations NOT to release more oil from their reserves.

The Bush administration also suggests that the Saudis have only so much capacity for drilling, and that it also is incumbent on the U.S. to step up production - Bush has pushed for drilling in the Arctic National Wildlife Refuge, with staunch opposition from environmentalists and Democratic leaders in Congress.

Cordesman, a student of Middle East military strategy and oil markets, believes that even an increase in production and slightly lower prices will not solve the problem in the long run.

“Even if you get a cosmetic agreement, and oil goes down to, say, even $100 a barrel, it doesn’t solve the economic pressures involved, it doesn’t affect the long-term market,” Cordesman said. “So the best cosmetic outcome isn’t going to have any meaningful impact on the global economy or global energy supply. It just can’t work like that.”